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PE firms turning to strengthening portfolio businesses while waiting out coronavirus volatility – survey

PE firms turning to strengthening portfolio businesses while waiting out coronavirus volatility – survey

US private equity firms are increasingly using their uninvested funds to strengthen existing portfolio companies amid the coronavirus pandemic putting the brakes on dealmaking, new research shows.

PE investors are on average spending 47% of their uninvested funds boosting portfolio businesses, a 7% increase compared to before the crisis, the latest survey from ECA Partners reveals.

The survey of more than 100 private equity professionals said 27% of PE investors plan to up their deal sourcing compared to before the Covid-19 outbreak, as they plan for an expected rebound.

Most investors expect PE revenues to return to pre-coronavirus levels by Q4 2020 or Q1 2021, the report said, adding that many investors have a positive outlook on the future.

ECA said that on average, respondents believe the Dow Jones Industrial Average will rise by 10% over the next 12 months.

“Private equity investors have close to $1tn in dry powder,” said Atta Tarki, CEO and Founder of ECA Partners.

“A number of these investors are telling us that they will be using those funds over the next few months to capitalize existing portfolio companies.”

The survey results show a clear shift in priorities among PE executives, from deal-making to a proactive focus on cost control initiatives across their portfolios.

In fact, 87% of respondents reported that they plan to spend more time managing costs over the next 90 days.

“A lot of PE firms are actually viewing this as an opportunity to explore maintenance projects, such as property renovations, given the sudden drop in day-to-day activity,” said Ken Kanara, ECA’s president and co-author of the survey.

Despite this focus on controlling costs, the survey also highlights many ways in which PE executives are already planning for the eventual rebound.

Tarki said, “Many investors realize they can’t produce positive returns on their existing investments by purely focusing on defensive strategies and reducing costs.

“They also need offensive strategies in order to grow revenues as soon as the economy picks back up.”

Equally, the survey shows that PE executives are preparing for a new round of investments. Tarki said, “Some funds are keeping their calm in the eye of the storm – raising capital and adding to their investment teams as they expect more lucrative investment opportunities to surface by the end of the year.

“General Atlantic, for example, announced earlier this week they are forming a $5bn fund aimed at investing in distressed assets.”

ECA said respondents hail from tenured committed funds, family offices and fundless sponsors across the US, ranging from small (Up to $100m assets under management) to very large (more than $10bn AUM).

The search firm specialises in placing top candidates in permanent project and interim roles with private equity funds and their portfolio companies.

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